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How to understand your Tax Code

 

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Your tax code is usually made up of several numbers and a letter, such as 647L.

What it means is the amount of money you’re allowed to earn before you get taxed on it. If your tax code is a number followed by a letter, then multiply the number by 10 and you’ll get the total amount of income you can earn in a year before paying tax.

So say that it is ’647L’ then the amount you can earn before you pay any tax is £6,470. If you earn £10,000, you won’t pay tax on £6,470 of it but you will have to pay 20% on £3,530. The letter’s connected to your personal circumstances, such as your age and whether you have two jobs.

A lot of people are on a 647L code, but there are other common ones too. If you start working a second job or your pay changes suddenly, tell the tax office so that you make sure your new code is right.  For example, if you were suddenly moved to a 117L code from a 647L code, this would mean that your untaxed allowance has gone down. For a 117L code, you could earn only £1,170 before paying tax.

Taxpayers on the wrong tax code can be overcharged, so check that your coding notice makes sense and you have been put in the right category. You could find that you’re owed some money from being on the wrong code for a while. Even if you’re undercharged for tax that could be bad because at some point the tax office will notice and demand back payment of tax!

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